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Depegging - 'just do it'
The question is not if to depeg or revalue, but when and how. To which the answers are now, and depegging to a basket of currencies.
The GCC did itself no favours by not addressing the issue at its summit and allowing speculation to continue when the problem is not going away. The weak US dollar is a real reflection of the North American economy, not a deviation from long-term trend lines.
The issues with the US economy are structural and deep. Its engine is stalling on the back of consumer debt and retrenchment. The Fed has to keep interest rates low just to keep its economy ticking over - and people in houses.
There are significant and real advantages for the US to maintain a weaker dollar. For decades it has suffered ever rising balance of payments issues. A weaker currency means imports are more expensive, and its exports much cheaper. For the first time in decades the dollar decline is allowing it to attack its trillions of dollars of debt.
If GCC countries maintain the present peg with the dollar, they maintain a dirham or riyal that is undervalued. That may work for China where a weak Yuan fuels its export led economy, but it serves no purpose in the GCC which, after stripping out oil, is a massive net importer of goods and services.
Weak GCC currencies make imports from all non-dollar zone countries more expensive, significantly more expensive. The dollar has declined in value against the euro by 15% over the last year. For all the price caps in the world, you cannot protect your economy from that kind of decline. Importers and merchants have to pass on the cost - or eventually go under.
The inflationary pressure from a weak currency comes at a time when rising oil money and internal and external investment is causing a shortfall in basic goods and services. The GCC would already have inflationary issues caused by scarcity - of housing, construction materials, etc - but a weak currency is petroleum jelly on the fire.
Holding back the moves to revalue or depeg the dirham from the dollar are two issues. Firstly GCC countries no doubt don't want their hand to be forced by speculators. That's understandable, but lowering interest rates to scare them off won't work forever - as Kuwait found. Speculators, like vultures, will hang around only when they spot the inevitable. They are not going away.
GCC countries also dislike a move to devalue the dirham because their reserves - including oil - and investments are largely priced in dollars. Whatever they revalue the dirham by, that's how much less those goods will be worth.
Adding further complexity is that the GCC wants to act in unison. As the Euro zone shows, however, one size does not fit all. While the UAE, with a significantly more diversified economy compared to may of its peers, sees an obvious and pressing needs for a revaluation and depegging of its currency; Saudi Arabia, with an economy fuelled by oil, sees the need to retain the dollar peg and the value of its assets.
The GCC urgently needs to come together to address the issue, and not remain tight lipped as it has done so far. Clarity will bring order back to the markets and end speculation. After all, a revaluation has to happen. Better to do it now, and make it a significant long-term revaluation, than let a problem that is resolvable fester.
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